STRATEGIC COST MANAGEMENT AND BUSINESS PERFORMANCE: A STUDY OF SMES IN KARNATAKA

Abstract

Globally, Small and Medium Enterprises (SMEs) play a most important role in most economies, especially in developing countries. Formal SMEs contribute up to forty five percent of overall employment and up to thirty three percent of national income (GDP) in developing economies. These numbers are considerably higher when informal SMEs are included. According to estimates, 600 million jobs will be required in the next fifteen years to absorb the increasing worldwide workforce, mainly in Asia and Sub-Saharan Africa. In emerging markets, most formal jobs are with SMEs, which also create eighty percent of 5 new positions. Indian SMEs segment has emerged as an extremely vibrant and active sector of the Indian economy over the fifty years. SMEs not only play a critical role in providing large employment prospects at fairly lower capital cost than big industries but also help in industrialization of rural areas. SMEs are complementary to big industries as ancillary units and contribute extremely to the socio-economic development of the nation. The Segment consisting of more than thirty six million units, as of today, provides employment to over eighty million persons. This segment also contributes about eight percent of GDP, in addition, more than forty five percent to the overall manufacturing production and more than forty percent to the exports from the nation. Despite their contribution to the economy, studies conducted on these SMEs reveal that more than half of the SMEs close their business within four years of their inception. One of the key reasons for these failure is their cost management system. These SMEs are under pressure to reduce or cut their costs in the short term. These short term cost cutting without considering the long term business strategy have resulted in very negative effect. Organization should understand the cost management is not a short term and tactical in nature. It requires a strategic focus and hence cost management is a strategic issue. There is an urgent necessity have a strategic approach towards cost management in the perspective of complete “business model” of the company. This current exploratory and descriptive study is conducted to investigate the effectiveness of implementation of Strategic Cost Management practices, tools and techniques from a business performance perspective of SMEs in Karnataka. Accordingly, the study analyzed the growth of SMEs in Karnataka, Cost Management Practices adopted by SMEs with special emphasis on their transition to modern Strategic Cost Management (SCM) practices, impact of this transition on their business performance and examine the relationship between the SCM Practices adopted by SMEs and their Business Performance Based on the outcome of the study, it is observed that SMEs after implementing SCM practices have benefitted significantly on their business performances. Accordingly it has been recommended that SMEs to adopt to the SCM Practices to be competitive, sustainable and grow in the current market scenarios. Keywords: Small and Medium Enterprises, SMEs in Karnataka, Cost Management, Strategic Cost Management, SCM, Business Performance, Balance Score Card